Unrealistic projections from management...

Although we do no rely entirely on company’s guidance while making
financial projections and instead take into account the overall macro
economic picture, global and industry trends and company’s competitive
position within the industry, we do give reasonable consideration to
management guidance as well. We do not altogether ignore the
management’s discussion and statements about future industry and
company scenario and critically examine management’s guidance in light
of current environment to see if the company could meet the guidance.

Based on our independent analysis of the auto
industry and Navistar, following is the variance between the financial
projections for Navistar and company’s guidance.

Company's Guidance

Estimates

Revenues 2008

$15 bn +

$14.1 bn

Income before tax 2008

$380 mn -$510 mn

$335 mn

Net Income 2008

$312 mn - $418 mn

$271 mn

EPS 2008

$4.26 - $5.72

$3.71

Industry shipments

15-19% decline

Navistar shipments

14% decline

Revenues 2009

$15 bn +

$16.1 bn

Profit from manufacturing segment

$1.6 bn

Income before tax 2009

$1,100 mn - $1,200 mn

$370 mn

We believe that Navistar’s 2009 guidance for income before tax seems quite unreasonable under the current circumstances due to following reasons. Navistar expects profit from manufacturing segment at $1.6 bn on total revenues of $15 mn implying a margin of 10.7% while in 2007 Navistar’s reported manufacturing profit of $426 mn on total revenues of $12.3 bn ( margin of 3.5%) . Also in 1H2008, Navistar generated total revenues of $6.9 bn while profit from manufacturing segment was $424 mn (margin of 6.1%). With intense competition and demand slowdown leading to pricing pressure on the one hand and commodity prices increase, particularly steel and aluminum, resulting in cost pressure we do not expect Navistar’s margins to expand substantially in the near-to-medium term.